KEDAR ENTERTAINMENT AND SOFTWARE COMPANY, MUMBAI vs. ITO WS 20(1)4, MUMBAI

This appeal has been preferred by the assessee against order dated 08/11/2011 passed by the Ld. CIT(Appeals)-31, Mumbai, for the Asst. year 2001-02, whereby the Ld. CIT(A) confirmed the penalty of Rs. 1,52,880/- levied by the A.O. u/s. 271(1)(c) of the Income Tax Act, 1961 (in short ‘ the Act’).

Brief facts of the case are that the appellant/assessee, a partnership firm, filed its return of income for the A.Y. 2001-02 declaring total loss of Rs. 21,430/-. However, the A.O. assessed the income of the appellant at Rs. 3,68,570/- u/s 143(3) read with section 147 of the Act, after making addition of Rs. 3,90,000/,- received by the assessee, as loan, from M/s. Kedar Metal Pvt. Ltd., having substantial interest, treating the same as deemed dividend u/s 2(22)(e) of the Act. In the quantum assessment proceedings, the appellant had accepted the decision of the Ld. CIT(A), who had upheld the addition. Accordingly the penalty proceedings u/s 271 (1)(c) was initiated and penalty order dated. 10/03/2010 was passed imposing penalty of Rs. 1,52,880/- u/s 271(1)(c) of the Act. The Penalty order was challenged by the assessee before the CIT(A), the first appellate authority. The Ld. CIT(A) after hearing the assessee dismissed the appeal of the assessee and confirmed the penalty levied by the assessing officer.

The appellant/assessee has filed the present appeal against the impugned order passed by the Ld. CIT(A) on the following effective ground:-

At the outset, the Ld. Counsel for the assessee submitted that in view of the ratio laid down by the Hon’ble jurisdictional High Court in CIT vs. Impact Containers P. Ltd. [1914] 367 ITR 346 (Bom), the impugned order confirming penalty is erroneous and liable to be set aside. The Hon’ble Court in this case has held that deemed dividend can be assessed only in case of a person who is a shareholder of lending company and not in the hands of the person other than shareholder. In the present case the assessee is not the shareholder of the lending company but one of the partners of the assessee firm is shareholder, therefore, the dividend is to be assessed in the hands of the partner and not in the hands of the assessee. In view of the above verdict, the impugned addition is not sustainable in the law as the penalty u/s 271(1)(c) was not leviable. The Ld. Counsel further submitted that this plea was not taken before the authorities below as the judgment in the above referred case was delivered in July 2014, after the order of CIT(A) in quantum proceeding, which was accepted by the assessee.

On the other hand the Ld. DR submitted the since the issue involved in this case was sub judice in the Hon’ble High Court at the time of passing assessment order and even during appellate proceedings before the Ld. CIT(A), the concurrent findings of the authorities below do not suffer from any legal infirmity.

We have heard the rival submission and perused the documents and also gone through the judgment relied upon by the appellant /assessee. The Ld. CIT(A) has confirmed the penalty levied by the A.O holding that the AO has passed the order in accordance with the provisions of law after considering the submissions of the assessee. Admittedly, in the present case M/s Kedar Metals Pvt. Ltd. has advanced loan of Rs. 3,90,000/- to the assessee firm during the relevant period but, the assessee firm is not the shareholder of M/s Kedar Metal Pvt. Ltd., rather one of the partners of the firm is the shareholder of the company having substantial interest therein within the meaning of section 2(22)(e) of the Act. The assessee could not raise this plea during the assessment proceedings as well as during the appellate proceeding as the verdict of the Hon’ble court came in the year 2014.

In CIT vs. Impact Containers P. Ltd. (supra), the revenue had challenged the order of the Income Tax Appellate Tribunal holding that the provisions of section 2(22)(e) of the Act cannot be invoked because the assessee company was not a shareholder in the lending company. The contention of the Revenue was that since the assessee is a common shareholder with controlling stake in the company, the provisions of section 2(22)(e) of the Act was applicable. The Hon’ble High Court dismissed the appeal of the revenue holding as under:-

In view of the law laid down by the Hon’ble jurisdictional High Court we find merit in the contention of the assessee. Since, the deemed dividend in question was taxable in the hands of the partner of the assessee firm being a shareholder having substantial interest in the lending company, the addition in question is not sustainable in the hands of the assessee firm. No doubt, at present we are concerned with the quantum proceedings, but even in the pending proceedings it is open to the assessee to demonstrate that the addition itself was not sustainable, in order to challenge the levy of penalty 271(1)(c) of the Act. Under these circumstances we find force in the plea of the assessee and, accordingly we are of the considered view that the impugned order is liable to be set aside. We, therefore, set aside the impugned order passed by the Ld. CIT(A) and delete the penalty of Rs. 1,52,880/- levied u/s 271(1)(c) of the Act. In the result, appeal filed by the assessee for the Asst. year 2001-02 is allowed. Order pronounced in the open court 20th July, 2016.